Semiconductor stocks are on a tear. The segment has sizably outperformed the broader market. Chipmakers are off to a strong start so far in 2020, but will it be able to maintain this momentum?
Intel (INTC - Free Report) reported its Q4 earnings after the bell on Thursday, January 23rd, and the markets loved what they saw. The business rounded out 2019 with a bang, beating both top and bottom-line estimates by a large margin. Intel’s resurgence in its data center segment propelled its revenues past 20 billion for the first quarter and pushed the share price up over 8% in morning trading.
Intel is the second largest semiconductor company in the world (behind TSMC), and its robust earnings have implications across the entire industry. Chipmaker shares were up across the board following this report.
Cloud service provider customers drove 48% year-over-year growth this past quarter, illustrating a rebound in datacenter hyperscaling. Semiconductor firms that benefit from hyper scaling include AMD (AMD - Free Report) , Nvidia (NVDA - Free Report) , and Broadcom (AVGO - Free Report) , all of which hit 52-week highs.
The rally in data center investment comes with the rollout of 5G and tech giants trying to stay ahead of the curve.
There has been a resurgence in semiconductor stocks since the beginning of June, as demand concerns ease. Chip investors were worried that there wouldn’t be enough global demand to meet supply. Concerns have been largely alleviated, and outlook for 5G infrastructure demand looks positive.
Whether 5G is going to change the world of is still up for debate, but tech companies are preparing for it none the less. This preparation is benefiting chipmakers. Smartphones, the internet of things (IoT), and data centers are all being upgraded for the 5G revolution, and this requires new chips.
TSMC (TSM - Free Report) , who fabricates more than 50% of the world’s chips, reported its earnings on Thursday, January 16th. The report was strong, and it gave us some insight into chip trends. TSMC’s biggest topline growth drivers for 2019 were from smartphone and IoT chips, which is in line with our expectations for the 5G rollout. TSMC saw a quarter-over-quarter growth in its data center segment with hyperscaling just beginning to take off again.
AMD, Nvidia, and Intel all stand to gain from data centers hyperscale investments as cloud players prepare for another big wave of customers. Broadcom’s 5G infrastructure chips and Qualcomm’s (QCOM - Free Report) 5G handset chip are both well-positioned to continue dominating their category as this technology is rolled out.
Below you can see the 52-week chart for all of these players with all but AVGO far outperforming the broader market.
Now we need to examine whether these stocks have run up beyond their intrinsic value or if there is more growth ahead. If you were to ignore short-term cyclicality, my favorite players in this bunch are NVDA and AVGO.
Nvidia’s high performing GPU’s are unmatched in gaming and data centers and is going to be an essential component for discovering AI. Nvidia has had quite a run in recent years and could be subject to volatility, but as a long term play, I am confident that this investment will pay off.
Broadcom is a semiconductor giant with a broad portfolio of products that range from chips to infrastructure solutions. The company is an acquisition machine with a unique ability to spot savvy investments. The business segments are diverse enough to hedge against the cyclicality of the semiconductor segment but still remains a leader in its categories.
AMD is trading at extremely rich valuations, with a forward P/E of 46x and a P/S that has run-up to its highest level in the stock’s history. I believe that AMD’s stock price is hanging by a thread as it competes in the GPU and CPU spaces against these category inventors Nvidia and Intel, respectively. AMD’s recent share price growth has been associated with Intel’s production issues and AMD’s ability to take some market share. This stock is very volatile, and its recent run-up only allows me to see more room to fall.
I like Qualcomm and its ability to innovate, but its recent licensing trouble it ran into with the FTC’s antitrust laws concerns me. Most of the business’s profits come from licensing, and if this is substantially inhibited, the company will be in trouble.
Below is what to expect in the upcoming earnings reports per Zacks Consensus estimates.
Semis saw good growth in 2019 and whether this will continue into 2020 remains to be seen, but they are off to a strong start. The world’s two largest chip companies have had robust December quarter reports. This positivity has continued to push its cohorts’ shares further and further.
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